Amidst all the signs of collapse emanating from the giants of the U.S. steel industry, a quiet, almost unnoticed revolution is taking place in the steel-mill towns of the Midwest -- a revolution that could well transform this most basic of basic industries. For generations the near-exclusive plaything of conglomerate deal-makers and corporate managers, the steel industry is reverting to the entrepreneur, a change that brings new hope to the devastated industrial heartland.
"We are making the future of American steel right here," says one of the leading revolutionaries, Tom Sigler, president of Continental Steel Corp. in Kokomo, Ind. "What's needed is the entrepreneur who is committed to this business and willing to see it through the long haul. The people who are going to make the difference are the entrepreneurs and the workers, the guys getting their hands dirty."
At Continental, Sigler is trying to turn around an 87-year-old company that has been fighting its way back from bankruptcy since 1981. Once among the Midwest's best-managed small steel companies, Continental is still reeling from the ill-effects of almost 15 years of systematic neglect by its former owner, Penn-Dixie Industries Inc., a New York-based conglomerate. Even today, most of the company's plant and equipment remain woefully out of date. In some sections of the aged, clammy mill, the mud is often so deep that workers have to slosh around in rubber boots. Despite recent increases in sales and efficiency, the company continues to lose over $1 million a month on sales that are expected to total less than $150 million in 1983.
Key to Sigler's comeback strategy -- and to the strategy of other new steel entrepreneurs such as Cliff Borland of Newport Steel Corp. -- is a bold attempt to seize upon the large, local-market niches created by the recent closings of numerous midwestern steel mills by giant companies. Sigler and Borland have consciously modeled themselves on entrepreneurs like Ken Iverson of North Carolina-based Nucor Corp., one of the many thriving, small, and efficient market-driven "minimills" that have risen throughout the Sun Belt during the last two decades. These midwesterners hope to create a "second wave" of entrepreneurial steel companies in the nation's troubled heartland.
"Right now, Ken Iverson is The Force in steel," Sigler maintains. "He's shown that the small companies with the new technology are showing the way -- not the Inlands or U.S. Steels. He's shown that despite all you hear, there's still a future in steel."
Like the "first wave" minimills that flooded Sun Belt markets and were virtually ignored by the majors, "second wave" companies such as Continental seek to build on local markets. From Kokomo, a city of 50,000 people 50 miles north of Indianapolis in the industrial heartland, Continental is within easy reach of the predominant U.S. market for wire products, which make up 85% of Continental's product line. Closings by five major companies in the past 10 years have reduced wire capacity by more than 900,000 tons. Much of that capacity is currently being replaced by suppliers as far away as South Carolina, Texas, and Trinidad. By purchasing wire produced in nearby Kokomo, major midwestern wire converters, appliance manufacturers, and spring makers can save as much as 10% on transportation costs alone, a central point in marketing director Rex Fager's recent successful campaign to boost sales at Continental.
To tap this lucrative market more effectively, Sigler, with the approval of Continental's new, locally oriented board of directors, has committed the company to a modernization scheme of around $37 million that could greatly increase the quality and range of the plant's wire products. With the inclusion of a new rod mill and a continuous caster, Sigler believes Continental could soon emerge as the Midwest's most competitive steel wire company. If the new rod mill opens in spring 1984, as planned, Pierre Stanis, Continental's financial adviser, projects sales will rise to at least $200 million by 1985, enough to turn a chronic money-loser into a highly profitable company.
"With all the new equipment, just give us a schmucky economy and we'll still make a good $10 million a year by the mid-1980s," Stanis predicts brashly. "Give us another steel depression and we'll outlast 95% of the people out there. This is becoming one hell of a strong company.
But Stanis, Sigler, and other top managers at Continental believe that ultimately the company's comeback may hinge on developing a new, cooperative relationship with its production workers. The recently approved pact with the company's union, for instance, places Continental's wage rates as much as 20% below those of the Big Eight steel giants. At the same time, Continental initiated a stock option program that, by the end of the decade, could give the 1,250 union workers up to 35% control of the company. To Sigler, the new union agreement epitomizes the unique symbiosis between labor and management that is absolutely essential for the survival of the U.S. steel industry.
"Although the technology may seem pretty basic, the changes of approach we are instituting are as radical as anything they do at Apple Computer," Sigler says, between sips of coffee in his wood-paneled Kokomo office. "What's needed is an entrepreneur who can communicate with the guys in the plant that it's your life as well as theirs, that you are really serious about steel. The guys at U.S. Steel, a David Roderick [chairman of U.S. Steel Corp.], don't see the people down in the mill. They're too distant. They're too big. They don't have the commitment."
"Commitment" is perhaps the one thing that most differentiates Tom Sigler and "second wave" steel entrepreneurs from their counterparts at the giant steel companies. Ever since Sigler took his first job at a mill, before he was 20 years old, steel has been his life and passion. Starting as a workman, he rose through the ranks at Detroit's McClouth Steel Inc., becoming plant manager at the company's huge Trenton, Mich., works. Yet he has retained strong ties to the often harsh realities of life within the mill. Sigler still carries scars from his legs to the top of his skull from a furnace explosion that nearly killed him 30 years ago.
Despite his own travails and the worst steel recession since the 1930s, Sigler remains drawn to "the mystique" of steel -- the hum and crackling of the furnace, the bands of red-white heat, the craftsman's pleasure in forging perfect cold steel from a smoldering inferno. As do many veteran steel men, Sigler, who works 12 hours a day with neither breakfast nor lunch, traces the tragedy now enveloping most midwestern mill towns to the lack of any such enthusiasm for steel on the part of the new generation of MBAs, lawyers, and accountants who increasingly dominate the industry's largest companies.
Unlike the metallurgists and steel marketing men who directed these companies in the past, the new managerial elite have no feel for the steel product itself; to them it is simply a widget that comes up on the balance sheet. When steel is down, as it has been since 1979, these "steel" managers feel no real compulsion to insure the industry's long-range prospects. Instead, where possible, they have simply shifted their company's assets out of steel, as in U.S. Steel's multibillion-dollar purchase of Marathon Oil Co. last year.
"These guys should never have been running a steel company," remarks one New York investment banker close to U.S. Steel's chairman Roderick. "They see the steel industry as one that can never come back. It's clear the chairman [Roderick] doesn't care about steel. He's going to get out as fast as his checkbook can take him."
Roderick and the other princes of Big Steel's managerial aristocracy lopped off as much as 20% of their wire-and-rod production during the '70s -- and analysts believe they could cut an additional 15% by 1985. In the process, they have created a near-depression-level jobless rate among steelworkers and threaten to devastate permanently the economies of such industrial centers as Kokomo, Gary, and Pittsburgh.
Furious over what they see as defeatism in the executive suite, many old-time steel executives have grown contemptuous of the pin-striped managers who today dominate their industry. This contempt is often expressed in jokes, many of them directed against Roderick, who, perhaps unfairly, has come to represent the trend against steel investments by the giant companies. One joke has Roderick dying and going to Heaven, only to be sent "downstairs" because he did not meet Saint Peter's requirements for admission. Disappointed, the chairman arrives in Hell, where he quickly frightens the daylights out of poor Satan. "Pete, you've got to take this guy back," pleads the Lord of the Underworld. "He's only been down here a week, and he's already shut down four of my furnaces."
Yet even as Big Steel beats a hasty retreat, frequently citing foreign competition as the cause, the minimills, based primarily in the Sun Belt, continue to grow. By concentrating at first on such simple products as reinforcing bar, known as rebar, needed in the commercial construction business and the fast-growing road business of the Sun Belt, over the past decade the minimills have increased their share of the nation's steel market from 3% to some 13%. By the 1990s, according to projections by the federal government, minimills could capture as much as 25% of the nation's steel business.
"This was an industry created by giants that became run by bureaucrats who were weak and didn't realize the rest of the world had suddenly gotten competitive," observes Frank H. Cassell, a former high-ranking official of Chicago-based Inland Steel Co., now professor of industrial relations policy at Northwestern University. "Their failures have been so great that they've created tremendous opportunities for entrepreneurs willing to exploit the niches left over by the majors. Whenever there's a buck to be made, you'll find that the entrepreneurs come out of the closet."
No less important than the minimill model, second-wave steel executives like Sigler also hope to revive the rich, albeit long-dormant tradition of midwestern entrepreneurism. When Continental Steel was founded in 1896, Kokomo bustled with creative new businesses. In a shop not far from Continental's red-brick main office, Elwood Haynes feverishly worked on the prototypes for America's first successful commercial car, the Haynes-Apperson. Later, the peripatetic innovator would emerge as the commercial manufacturer of stainless steel. Although Haynes would remain Kokomo's most famous innovator, other products first developed in Kokomo include the pneumatic rubber tire, aluminum castings, the auto carburetor, and the all-transistor auto radio. Kokomo still fancies itself the "city of firsts."
Continental Steel flourished in this heady entrepreneurial atmosphere. Locally owned and controlled, it boomed from $6,000 in capitalization to more than $2 million in its first eight years. In its long history as an independent company, Continental turned a profit virtually every year and -- even in the Depression -- never laid off a worker.
"The community was everything to us back then," recalls Howard C. Williams, whose father, Art, was involved in the company's founding and who joined Continental himself in 1935. "We were the biggest company in town. Our people were always kept up with the most recent changes. We felt we were the best darn steel company in the nation."
By the 1960s, however, major changes were transforming both Kokomo and Continental. The postwar boom had brought some of the nation's largest industrial giants, including Chrysler, GM/Delco, and Cabot, to the city. At first, the factories of these outside-owned companies brought widespread prosperity. New shopping malls rose along the outskirts of town, and well-paid union workers eagerly spent their paychecks in the chain stores that quietly replaced the locally owned shops.
In this atmosphere, few people objected when a fast-rising New York conglomerate, Penn-Dixie, bought up Continental in 1967. Under the rule of master conglomerator Jerome Castle, decision-making power was, in effect, taken out of the hands of local managers and given to financial analysts working out of New York boardrooms. For the next 10 years, Penn-Dixie drained an estimated $35 million from the profitable Kokomo mill, spending much of it on highly dubious land speculations in the swamps of Florida and elsewhere, while refusing to make the capital improvements necessary to keep the steel plant competitive over the long haul.
"We gradually allowed. . . out-of-town corporations to dictate our economic fate," says Steve Daily, Kokomo's mayor. "It happened gradually, so we didn't pay attention to local business that died or got taken over. It was like a drug addiction. We needed the outsiders; we had to have them. We forgot what it was to be entrepreneurs and control our own destiny."
As a result of massive plant closings dictated by these outsiders, Kokomo, two decades ago one of the richest small towns in the United States, today suffers an unemployment rate of nearly 16%. At Christmas, in the elaborate enclosed shopping malls where many of the stores now stand vacant, the families of unemployed factory workers sell trinkets in the eerily quiet corridors.
Until recently, it seemed all but inevitable that Kokomo steelworkers would soon join the city's swelling ranks of unemployed. While New York-based executives screamed for ever-higher production numbers, neglect of equipment rapidly lowered the quality of the mill's once-excellent product. By the early 1970s, the inefficiencies of the rod mill -- where coils are made for processing into wire and other products -- led the company to surrender such lucrative market areas as high carbon wire, essential for long-established customers in the mechanical springs, bedding, and upholstery industries.
Even worse, during the 1973-74 steel shortage, Penn-Dixie's New York management forced the company's marketing division to divert supplies from long-established customers to friends of president Jerome Castle. One Castle crony, never before a company client, demanded and received 20% of the company's 240,000 tons of total production, leaving many long-time Continental customers in the lurch.
"We were told we could do nothing about it," recalls Rex Fager, who was then a salesman and is now director of marketing at Continental. "Some of our old customers are still mad about it. There are people who still won't buy from us because of it. And yet after the shortage, Castle's people totally deserted us."
When the steel shortage turned to a glut by late 1975, this mistreatment of old customers devastated the Kokomo mill. Orders fell by more than 30%; for the first time, the company went into the red. Only recently has it begun to turn around. Conditions worsened in 1977 when Jerome Castle's machinations led to a full-scale investigation by the Securities and Exchange Commission, ultimately landing the former Wall Street hero in jail on fraud and conspiracy charges in 1979. The following year, its bank credits exhausted, Penn-Dixie filed for bankruptcy, putting the entire Kokomo operation in jeopardy.
But, through a company reorganization, Penn-Dixie's new chairman and chief executive officer, William Scharffenberger, sold off enough of the conglomerate's assets in 1981 to allow the Kokomo mill to reorganize as an independent company under the old Continental trademark. Sigler's corporate strategy centered on winning back the company's once-solid base of midwestern customers. Under Penn-Dixie, Continental had a reputation for poor service and poor quality. Sigler pushed managers to upgrade on-time delivery from 60% to 87% within two years and pursued a program of "value analysis review" with customers to help them spot potential problem areas as well as find ways to save money with steel products.
"We're getting our old identity back," claims Fager, a 29-year Continental veteran. "We're a quality wire producer in the heart of the Midwest market, and we mean to service that market for a long time. Everyone's going to know we're back on the map. The orders are on the increase, and in this great market we're in, we're very excited about the future of this company."
This new confidence received a major boost recently when financier Pierre Stanis informed top Continental officials that financing for the company's new $18.5 million rod mill would soon be available. The mill will allow Continental both to increase the size and improve the quality of its rods. At the same time, the company will once again have the capacity to enter such previously discarded yet highly profitable markets as high carbon metals, which are needed by the expanding industries of springs and fasteners.
In addition, the improving financial picture greatly increases the chances for more financing for a new $15 million continuous caster by the end of 1984, an innovation that Stanis calls "the last piece in the puzzle." Combined with the new rod mill, the caster could help Continental increase its rod capacity some 30%, to 450,000 tons per year. "People who wouldn't talk to us before are now standing in line to lend us money," Stanis says. "Now they're going after us because they realize this company's going to be a gold mine."
Despite the good news from the marketplace, Continental's comeback hinges on the one major factor that never seriously threatened the "first wave" Sun Belt minimills -- a strongly unionized work force. Reconciling entrepreneurism with trade unions, impossible in some observers' view, is, at the least, difficult to accomplish. Exacerbating the problem at Continental, moreover, is deep-seated worker distrust of management motives, a bitter legacy of the Penn-Dixie days.
"We had a pretty cooperative relationship here until Penn-Dixie came in," recalls Bill Collins, president of Steelworkers Local 1054. "They let the machinery fall apart -- the shop floor is still like a pigsty. It will take a lot to get the people here to forget. Sometimes it seems that we're the ones who always have to make the concessions -- it's pretty damned hard to tell people they've got to give up more."
To overcome union resistance during the recent round of labor negotiations, Sigler sought to offer a new kind of partnership with the plant's workers. The former mill-hand cut his own pay by 10% and declined a pay raise stipulated in his conract. At the same time, he and steel-union officials crafted an unusual agreement, combining large-scale wage-and-benefit cutbacks with a pledge to hand over a big chunk of the company's future profits to the workers. Provisions were made to issue an additional 6 million shares to the unionized employees.
Union leader Collins believes that the intensified use of "labor-management participation teams" that let workers help solve plant-level problems, combined with the increased ownership interests of company workers, will create a new attitude within the mill. "We are beginning to feel like this is our company again," Collins said in the union's ramshackle hall on the outskirts of town. "With Big Steel going down, there's going to be an opportunity for us to make some real bucks because we've got all that stock. We've got to make this place work now."
To many of those involved with the negotiations, the labor agreement signals the onset of a radically new era for both Continental and Kokomo. After decades of letting corporate outsiders direct their lives, a new self-reliance, a new determination has swept over Kokomo. And, if the coalition of labor and management can make it work on the tough industrial battlefield, the "city of firsts" may well have made its most startling innovation of all.
"The future's going to be like that -- either we all become entrepreneurs, or we all go down the tubes together," Tom Sigler says, as the night chill begins to fall over the flat plains of Kokomo. "It's going to go down to the individual guy, in this office, on the line, his decision that his company just can't fail. Once people make up their minds about that, we can do just about anything."
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